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Banking on Sustainability: Structural Adjustment and Forestry Reform in Post-Suharto Indonesia

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Banking on Sustainability: Structural Adjustment and Forestry Reform in Post-Suharto Indonesia by Christopher Barr Christopher Barr is a forest policy scientist with Adjustment and Forestry Reform in Post-SuhartoBanking on Sustainability: Structural Indonesia the Center for International Forestry Research Banking on Sustainability: (CIFOR), based in Bogor, Indonesia. As a member of CIFOR’s program on the Underlying Causes of Deforestation, hiswork has largely focused on the Structural Adjustment and Forestry changing structure of Indonesia’s wood-based indus- tries, the role of financial institutions in funding Reform in Post-Suharto Indonesia. forestry sector investments, and decentralization of forest administration. WWF Macroeconomics Program Office Center for International Forestry Research (CIFOR) 1250 Twenty-Fourth Street, NW office address: OFFICE PROGRAM Washington, DC 20037-1175, USA Jalan CIFOR, Situ Gede—Sindangbarang Bogor Barat 16680, INDONESIA Phone: (202) 778 9752 Fax: (202) 293 9211 mailing address: E-mail: [email protected] P.O. Box 6596 JKPWB, Jakarta 10065, INDONESIA Website: http://www.panda.org/mpo tel: +62 251 622 622 - fax: +62 251 622 100 email: [email protected] website: http://www.cgiar.org/cifor CENTER FOR INTERNATIONAL FORESTRY RESEARCH FORESTRY CENTER FOR INTERNATIONAL © Copyright WWF Macroeconomics Program Office, October 2001 for Sustainable Development Sustainable for © 1986 Panda symbol WWF–World Wide Fund for Nature (Also known as World Wildlife Fund) Photographers Bruce Bunting/WWF Banta D. Manullay Howard Buffett Peter Rodman ACROECONOMICS M Banking on Sustainability: Structural Adjustment and Forestry Reform in Post-Suharto Indonesia. by Christopher Barr 1 Acknowledgements I would like to express my gratitude to the Center for Adi Resanata Somadi Halim, Trenggono Purwosuprodjo, International Forestry Research (CIFOR) and WWF- Canecio Munoz, Akie Setiawan, Mohamad ‘Bob’ Hasan, International’s Macroeconomics Program Office, which and other forest industry officials who graciously jointly sponsored the study presented in this book. responded to my requests for interviews and information In particular, I extend my sincere thanks to David about the activities of their companies. Kaimowitz for the conceptual guidance and enthusiastic support he has given to this project. His many insights I owe a debt of gratitude to Nabiha Muhamad who have broadened my understanding of the forestry reform has devoted countless hours to circulating clippings on process currently underway in Indonesia; and his forestry and finance issues from the Indonesian and commitment to supporting policy processes with well- English-language news media, which have proven to be documented research have strengthened my own extremely useful to my research. My comprehension of purpose in carrying out this study. I thank David Reed the activities of investment banks and pulp producers has for his patience and for guiding the publication and been strengthened considerably by insights from Peter dissemination of this study’s findings. Cain, one of the very few financial analysts to look seriously at the risks associated with fiber shortfalls at The research conducted for this study was funded, in Indonesia’s largest pulp mills. I also offer my sincere part, by WWF-Austria, WWF-Switzerland, and the United thanks to Nick Laird for generously sharing his expertise Kingdom’s Department for International Development. in international finance during the initial phase of WWF-Indonesia has also assisted in the dissemination this project. of some of the study’s preliminary findings. I gratefully acknowledge the support of each of these organizations. It has been my good fortune to spend much of the past Any opinions presented in the following chapters, three years based at CIFOR in Bogor, Indonesia. Several however, are those of the author and do not necessarily colleagues deserve special mention. I offer my heartfelt represent the official policy of any of these organizations. thanks to Jeff Sayer for providing the opportunity to be involved with the fine institution that he built during his During the course of my research, I was assisted by tenure as director general. William Sunderlin has my numerous friends, colleagues, and informants in both the enduring gratitude for his unflagging friendship and forestry and financial sectors who helped me to better clear-minded inputs at each stage of this project. My understand the processes I have sought to document. understanding of Indonesia’s pulp and plantations sector While it is not possible to mention each of these individ- has benefited greatly from the generous insights shared uals by name, I am grateful to all who shared their time by Grahame Applegate and Christian Cossalter. Similarly, and expertise with me. My understanding of the financial I have learned a great deal about the Indonesian Bank institutions involved in funding forestry sector invest- Restructuring Agency’s corporate debt resolution efforts ments has benefited enormously from conversations with from Bambang Setiono, who coauthored Chapter Five. Masya Spek, and I extend my deep appreciation for the I thank Lini Wollenberg for the buoyancy she offered generosity with which she has responded to my many at difficult turns in the writing process. I also greatly queries over the last two years. I thank Charles appreciate Patricia Shanley’s steady reminders to stay Joesriemerst for explaining the nuances of conglomerate focused on the people and trees for whom this study is financing in Indonesia and for sharing numerous insights ultimately dedicated. Finally, I am grateful to Ambar Liano acquired during his two decades of involvement with for handling many of the logistical details associated with timber and pulp producers. I thank Messrs. Soedibyo, this project. 2 Several of the chapters in this book have benefited from I thank Brent Nordstrom, Heike Mainhardt, and others critical feedback offered by both internal and external at the WWF Macroeconomics Program Office who have reviewers. In particular, I wish to thank David Kaimowitz, overseen the technical aspects of bringing this book into William Sunderlin, Neil Scotland, and three anonymous print. I am grateful to Sherri Alms for her fine job external reviewers for providing comments on drafts of editing the manuscript. Chapter Three, which focuses on reform of Indonesia’s HPH timber concession system, and portions of Chapter Finally, I offer my deepest appreciation to my family Five’s discussion of forestry sector debt. I thank Reed and close friends for their unwavering support for my Merrill, Arnoldo Contreras-Hermosilla, Bill Magrath, work. Whatever positive impact this study may ultimately Grahame Applegate, Christian Cossalter, and Ken have is due, in no small part, to the love, patience, and MacDicken for providing detailed comments on early encouragement that each has extended since the project versions of Chapter Four’s analysis of Indonesia’s pulp was initiated. I only hope that I am able to respond in and paper industry and portions of Chapter Five. I, alone, kind. however am responsible for any errors in fact or interpretation that this study contains. C.B. Bogor, Indonesia In addition to the substantive inputs provided by those September 15, 2001 mentioned above, a number of individuals provided critical assistance with the process of writing the chapters that follow. I express my profound thanks to Lucy Aghadjian and Richard Ryan, each of whom helped me Disclaimer: The opinions expressed in this report are the views of the author and do not necessarily represent the official policy of either CIFOR or WWF-International’s keep this process in motion when it often seemed Macroeconomics Program Office, the study’s joint sponsors. These opinions, likewise, do insurmountable. I am also indebted to Sarah Laird and not represent the official policy of WWF-Austria, WWF-Switzerland, WWF-Indonesia, the Janet Feigelstein for their assistance in regaining focus United Kingdom’s Department for International Development, or any other organization at critical junctures when the writing had stopped. involved in funding or disseminating this study. 3 Contents Chapter 1 Introduction: Financial Crisis and Forestry Sector Adjustment 9 Sustainability as a Policy Goal 10 Restarting the Forest Sector Adjustment 11 Broadening the Reform Agenda 12 Constraints on Forest Sector Adjustment 14 Scope of this Book 16 Organization of the Book 17 Chapter 2 The Development of Indonesia’s Forest-Based Industries Under Suharto’s New Order Regime 1966-1998 19 The Legal-Regulatory Basis of New Order Forestry Policy 20 The Rise of Indonesia’s Export-Oriented Logging Industry 21 Downstream Investment in Plywood Production 24 Diversification into Pulp and Paper Production 28 Chapter 3 Will HPH Reform Lead to Sustainable Forest Management?: Questioning the Assumptions of the “Sustainable Logging” Paradigm 37 Assumption #1: Controlling Log Supply, Without Taking Any Steps to Reduce demand for Industrial Timber, is an Effective Strategy for Sustaining the Natural Forest Resource Base 39 Assumption #2: The Most Effective Means of Restricting Indonesia’s Log harvests to a Sustainable Level is by Reforming the HPH System 41 Assumption #3: Increased Efficiency Will Promote the Conservation of Natural Forests 45 Assumption #4: Sustainable Concession Management is Profitable 49 Assumption #5: The Indonesian Government has the Institutional Capacity to Enforce the Proposed Changes in the HPH System and the Forest Products Trade 53 Conclusion: Reorienting Timber Sector Reform 55 4 Chapter 4 The
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